Nature of Joint Ventures
A joint venture is a business arrangement whereby two or more parties come together to accomplish a specific task or business goal even though they retain their distinct identities. Joint ventures are similar to partnerships in that the parties pull resources together, share ownership and control as well as risks and returns of the business.
The similarities however end there as joint ventures are for a limited purpose and period (i.e. execution of oil and gas contracts, telecoms contracts, equipment supply etc). Once their purpose is achieved, liabilities are discharged and profits shared, the joint venture is brought to an end. Partnerships, on the other hand, enjoy continuity with partners signing up to a long term business relationship.
A joint venture is business model that is highly under-utilised in Nigeria, particularly among indigenous Nigerian business organisations. The rationale behind the joint venture is that every person or business entity has greater strength, resource and comparative advantage to deliver on a key component required for the effective delivery of a product or service to the market. On its own, a business may struggle to be competitive in a tough business environment. However, pulling its own strength with that of a joint venture partner, risks become lowered and competitive advantage gained in the marketplace; though care need be taken to avoid breach of anti-trust and market monopoly laws.
Essentials of a Joint Venture Contract
A formal contract is important to the smooth running of a joint venture. It ensures that there is clarity on the limited purpose of the joint venture and on the parties rights and duties. The following are some of the main terms to be found in a joint venture contract:
Name
The name in which the joint venture business is to be conducted
Place of Business & Term
The place of business is much like the registered address of a Company. The term states the date of commencement of the joint venture (i.e. upon execution of agreement) and its’ duration subject to earlier dissolution upon the sale or disposal of the Joint Venture and the payment or satisfaction of all debts of the Joint Venture.
Purpose
This states the business for which the joint venture was formed and restricts the Joint Venture to that business or activity except where there is consent in writing of the Joint Venture Partners to do otherwise.
Capital
Businesses require capital to operate. Thus an amount is fixed as the initial capital of the joint venture to be contributed to by each partner according to his/her share of or percentage interest in the joint venture. Provision is also made for increased capital through additional contributions by partners or through loans as may be required by the Joint Venture for carrying out the purposes of the Joint Venture.
Percentage Interest
The percentage interest owned by each partner in the joint venture.
Profits
Distribution of net profit based on the percentage interest of joint venture partners
Expenses
Losses and disbursements of the joint venture to be borne by the Joint Venturers according to their respective percentage interest in the joint venture.
Duties
This assigns duties to the joint venture partners according to each person’s relative strength. For example, in a commodity sales joint venture, Mr. X may be the expert at sourcing commodities while Mr. Y can be the master of the markets in finding buyers.
Powers
This lists the powers to be exercised in the name of the joint venture with the consent of all Joint Venturers. Examples include power to borrow, incur debt, extend credit, guarantee obligations of third parties, acquire property, sell, encumber, mortgage or refinance any mortgage of Joint Venture property.
Proprietary & Confidential Information
This is one of the most important clauses in a joint venture contract.
Joint Venturers make an exception and share among themselves knowledge, information and resources that are confidential and not normally disclosed to third parties. Each Joint Venturer considers its confidential information an asset of substantial commercial value having developed it/them at considerable time and expense.
Confidential Information can include, without limitation, Technology, Technology Improvements, Derivative Works, Intellectual Property Rights and so on.
The question that arises is how does the owner of confidential information ensure that confidential information is not exploited to his detriment by former colleagues after the joint venture has ended?
Thus it is common to agree for the duration of the joint venture and for 2 years thereafter that the party receiving confidential information shall treat all Confidential Information disclosed as secret and confidential and shall not disclose all or any portion of the Confidential Information to any other Person, except under very strict terms and conditions stipulated under the Agreement.
Deadlock
This clause provides for buy-out of a Joint Venturer’s interest in the event that the Joint Venturers differ on a material issue and cannot agree on the conduct of the business and affairs of the Joint Venture.
Legal Title
The parties normally agree that title to the Joint Venture assets, including the Joint Venture itself, remains in the name of the Joint Venture.
Transfer of Interests
Usually, no Joint Venturer can sell, transfer, assign, encumber or charge his/her interest in the Joint Venture without the prior written consent of the other Joint Venturer and upon terms usually expressed under this clause.
Other Activities of Joint Venturers
Individual Joint Venturers are not usually precluded from engaging in separate business activity of their own as long as these do not undermine the Joint Venture or compete with it.
Termination
This makes provision for liquidation of the joint venture and the manner of distributing proceeds on expiry or sooner determination of the joint venture.
Arbitration
No Joint Venture Agreement is complete without providing for arbitration of disputes arising out of or relating to the Agreement.
Governing Law
Joint Ventures very often involve parties from different jurisdictions coming together. This tends to raise the question of which laws are applicable and which domestic courts have jurisdiction over the Joint Venture agreement. The answers to these questions are normally negotiated between the parties. Key determinants are usually the nature of Joint Venture business, the jurisdiction of business activity, whether the business is international or cross-border in operation.
